Having a life cover can protect you and your loved ones from financial loss. It can also be used as collateral against a loan.
While having a life cover can position you better with lenders, there are a couple of things that you need to consider before you cede your policy to cover a loan. We break down what it means to cede a loan and how it will affect your policy and other factors that need to be considered.
What type of loan can I use my Life cover for?
Becoming a homeowner is part of the major decisions that you will make at some point in time. Majority of home seekers will be applying for a bond. You will be asked to provide security against a loan to show that the bond will be paid off in the circumstance of an untimely death. This is where you can use your life cover as collateral against your home loan, or the paying off any debt that you may have accumulated. However, it is important to understand the implications that come with ceding your life cover.
What does it mean to cede a loan?
When you cede your cover, this means that you give the bank or a lender the power to claim the amount that you owe from it. What people tend to overlook is that this could be deducted before your claim is paid out to your loved ones, which decreases the amount that they will receive at the end of it all.
For example:
Steve is insured for R5 million. He uses it to cede his bond, which is to the value of R2,3 million. He passes on before paying off the remaining amount of R2 million. The bank claims the remaining R2 million from his life cover before his loved ones receive the payout. Instead of receiving the total sum of R5 million they will receive R3 million. If the policy comes with a built-in funeral benefit of R50, 000 this will be taken from the R3 million leaving them with R2 950 000.
What factors must I consider before using your life cover for a loan?
Carefully considering the effects that ceding a loan will have on your loved ones is important. Speaking to your insurer or a financial provider can help you make an informed decision that will protect the future of your loved ones.
Another factor that you should consider is if you are taking enough life cover that will protect the future of your loved ones. The common mistake is to focus on the premiums that are being paid, but at the end of the day, it is vital to consider the features that come with your life cover. You could also consider putting other financial features in place such as cutting back on expenses that can help you reduce the amount you owe on your bond.
